Why not let China build its EVs in Canada?

This opinion was written by David Olive and was published in the Toronto Star on June 27, 2024.

There is a certain inevitability to the onslaught of Chinese electric vehicles (EV).

Chinese automakers account for more than half of global EV sales.

Chinese EVs have made significant inroads in Western Europe, South America, Mexico, the Middle East, Africa and Australia.

Ottawa signalled this week that it probably will impose tariffs on Chinese EVs, following the recent examples of the U.S. and the European Union (EU).

Chrystia Freeland, the federal finance minister, vowed on Monday that Canada won’t become a “dumping ground” for Chinese EVs.

But there’s a better way to address this issue than with that kind of brazen protectionism. More on that later.

Last month, the U.S. roughly quadrupled tariffs on Chinese EVs to as high as 102 per cent. The EU is planning surtaxes on Chinese EVs as high as 38 per cent. But the EU is negotiating with Chinese officials before imposing tariffs.

China is a major export market for EU goods including vehicles. The EU rightly worries about retaliation from China, which is already musing about higher tariffs on EU food imports. And Canada should think twice, as well, with about $22 billion a year in Canadian exports to a China at stake.

And logically, in time Ottawa would have to expand its tariff regime to Chinese EVs assembled in Mexico, Europe and Brazil.

Canada has embarked on a statesubsidized megaproject to create a Canadian EV supply chain. At first glance, that project could be undermined by an influx of budgetpriced Chinese EVs. But is China’s determination to supply the world with affordable, well-made, zeroemission vehicles a threat or a blessing?

Canada cannot meet its net-zero carbon emission goals without mass adoption of EVs. But consumers are hesitant in making the EV transition, with the average EV priced about 15 per cent higher than the average Canadian new car price of $66,000.

Traditional automakers are to blame for that buyer resistance, U.S. auto analyst Felipe Munoz told Bloomberg this month.

“Negligence from legacy automakers, which has resulted in consistently higher car prices, has inadvertently driven consumers toward more affordable Chinese alternatives,” Munoz said.

The cheapest Chinese EVs sell for one-third or less the price of a North American counterpart. An example is the Seagull, a small hatchback made by the leading Chinese EV automaker, BYD (“Build Your Dreams.”)

The Seagull’s base price is about $13,000, compared with $54,000 for Ford Motor’s Mustang Mach-E, one of the less expensive EVs in the North American market.

The Mustang boasts longer range between charges than the Seagull and greater acceleration.

But a Seagull with about 300 kilometre of range, acceleration of 0-to-96 km in 11 seconds, six airbags and a sophisticated infotainment system, is an ideal entry-level car and well-suited to city driving.

The Chinese EV industry has benefited from immense government subsidies. But the Canadian EV industry is also heavily subsidized, by more than $50 billion in government handouts.

There’s no secret to BYD’s success. It has spent about 30 years mastering the art of low-cost production.

For example, a Seagull comes with just one windshield wiper. That’s one less blade assembly and motor to pay for. Minimizing costs is a priority in every aspect of vehicle design and manufacturing methods for BYD and its largest Chinese rivals.

BYD is building assembly plants in Europe and Mexico. It expects its Mexican plant will employ about 10,000 workers.

That points to a Canadian compromise.

Canadian governments have attracted Volkswagen, Honda, Stellantis (Jeep, Chrysler, Fiat) and other international firms to build a Canadian EV supply chain. Those governments could tap major Chinese EV makers BYD, Zhejiang Geely, SAIC Motor or Great Wall Motor to include Canada in their expanding networks of assembly plants.

This moment recalls the similar onslaught of Japanese vehicles in the 1970s and 1980s.

Initially protectionist North American and European leaders eventually decided that the greater competition and fuel efficiency from the Japanese cars was a net benefit to their economies and the environment. And they were ultimately averse to denying motorists the freedom to choose the best vehicle for them.

The Japanese automakers, for their part, committed to building in North America and Europe the vehicles they sell in those regions. That includes the Toyota and Honda assembly plants in Ontario.

Today, a BYD could assemble in Canada the vehicles it sells here. It could also commit to buying its parts from local suppliers, as it has done in Europe.

The payoff would be lower car prices and greater choice for Canadian consumers, and more widespread adoption of EVs. Traditional automakers would be pressured to accelerate their own reductions in production costs.

Building tariff walls reduces competition and maintains artificially high prices. Worse, in this case, the tariffs would impede progress on climate change.

Ottawa might decide otherwise, but knee-jerk EV tariffs are a bad idea.